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Food For Thought
Reviewed by Tim Stonesifer
THE OMNIVORE’S DILEMMA: A
Natural History of Four Meals
By Michael Pollan
464 pages; Penguin Books, 2007
T
here are 38 ingredients in a Chicken McNugget. Thirteen are
derived in some part from the
ubiquitous tropical grass zea mays, better
known as corn. In fact, from the nuggets’
modified cornstarch and partially hydrogenated corn oil to the high fructose corn
syrup in the ketchup and soda, an afternoon at your local fast food joint can be
seen as one giant buffet of corn and its
derivative sugars. It’s enough to make you
wonder why corn is king in America.
Michael Pollan’s book The Omnivore’s
Dilemma tries to answer that question and
others about your food, including perhaps the most basic of all: What should we
have for dinner? The answer, Pollan contends, hinges on our understanding of
where the food we eat comes from — be it
the American industrial food chain, a
small, independent organic farm, or something we’ve hunted and gathered ourselves — and what sacrifices were made to
get it to our tables.
If we are, as Pollan argues, “not only
what we eat, but how we eat,” then our
complex processed foods must be examined with an eye toward how they have
taken up residence at the center of our
tables. Any such inquiry, he contends,
must begin by tracing the history of corn,
which is present in over half of the 45,000
items in your typical supermarket.
The ties between corn and
America date back to the Americans Indians who first introduced European settlers
to their maize plant. The Europeans quickly found it ideally adapted to the North
American climate and, thanks to its hearti-
KING CORN
Tim Stonesifer is a small business owner and a
writer for the Hanover Evening Sun in Hanover, Pa.
ness, versatility, and yield, their early
acceptance of it helped them to survive the
harsh winters in America. Corn soon presented itself not only as a versatile food,
but also a convenient currency, cementing
its prominence in the fledgling colonies.
Corn’s first watershed moment,
though, came in the early 20th century
when breeders succeeded in engineering
hybrid strains that farmers had to purchase each planting season. Previously, a
farmer could buy a quantity of corn once
and plant a second-generation crop after
the first went to seed. The
new hybrids were, according
to Pollan, “corn as intellectual property,” and such plant
patents paved the way to everincreasing yields of corn.
But the boon would not
last. Starting with the New
Deal’s interference in agricultural markets, and then
with the passage of the Agricultural Act of 1949, corn
would shift from miracle
foodstuff to welfare queen. The 1949 legislation begins innocuously: “To provide
assistance to the States in the establishment, maintenance, operation, and expansion of school-lunch programs, and for
other purposes.” Those “other purposes”
turned out to be a vast network of loans,
purchases, and price supports for corn,
wheat, and other feed crops. And with
corn the easiest of plants to grow, the
inevitable effect was a spike in production, with other crops (including livestock
and the whole notion of a diversified farm)
quickly taking a back seat. Overproduction
of corn soon became the norm, and
mountains of yellow kernels began to sit
outside until rotten.
The final step toward “King Corn”
resulted from another government intervention, this time by Earl Butz, Richard
Nixon’s second secretary of agriculture.
Beginning in 1973, as supermarket prices
soared and shoppers protested, he began
removing the price floors that had dominated since the New Deal and been
strengthened mid-century. Butz moved
the government toward even more destructive regulation: a system of direct payments
to farmers. By guaranteeing a buyer for
corn at any price and encouraging farmers
to “get big or get out” in their production,
Butz opened the door for American farmers to grow as much corn as they could
regardless of market demand.
Those perverse incentives have led to
$5 billion in corn subsidies each year and a
market price of $1 less per bushel of corn to
the farmer than the cost to grow that same
amount. Such market distortions inevitably
occur when government plays favorites and
decides it can direct resources and lives better than autonomous individuals operating in a market.
That is clearly the case with
corn: by artificially inflating
its price through payments
and subsidies, our central agriculture planners have caused
an otherwise moderate stream
of corn to overflow its banks.
Pollan expends much
effort following this “river of
corn” from America’s farms
to its tables. He tracks it to
processing plants that deconstruct and
rebuild it into high fructose corn syrup,
and he follows the 60 percent of it destined
for U.S factory farms. These Concentrated
Animal Feeding Operations (cafos)
emerged over time in response to the
mountains of unused corn. They managed, both through economies of scale
and through converting animals like cattle
and salmon to corn consumers, to provide the cheapest meat.
cafos present stomach-churning pictures of a “rolling black sea of bovinity” in
which a steer eats corn “hock-deep in
manure … overlooking a manure lagoon.”
Pollan follows this same steer to its ultimate end at the abattoir, detailing from
a source (as he was not granted access)
the gruesome end of these animals, complete with stories of bloody errors and
animal suffering.
Omnivore offers many disturbing
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images of our industrial food chain. And
when Pollan details life on the small, idyllic Salatin farm in Virginia, with its diversity of species and transparency of
methodology, the reader can’t help but
be struck by the contrast. “This is the way
we should farm,” is Pollan’s unspoken but
obvious conclusion. Small is better.
Here the book falls victim to confused
thinking, blaming producers for following the incentives they’re presented in hamstrung markets. A culture of cheap and
fast food, which Pollan sarcastically calls “private property at
its best,” may be made up of
chicken nuggets with 38 ingredients, may be laced with prodigious amounts of corn syrup,
and may leave him “not satisfied, but simply, regrettably
full.” But it also represents a staggering
degree of human thought and productive
action that’s made food affordable to
almost everyone in the United States and
many other countries around the world. It
is the natural creative response of those
working with and around the governmentimposed constraints they face. The author,
though, still yearns for a better way.
requires animal processing facilities to
have a bathroom set aside solely for the use
of government inspectors, those trying to
run an organic family farm today face an
uphill battle.
Centrally imposed organic standards
have caused valuable local farm knowledge to be lost. An hour spent in the
Whole Foods store provides shoppers myriad stories of animals living care-free, country lives, and lyrical narratives about organic vegetables on picturesque hillsides.
network of larger agribusinesses and force
out some smaller farms.
Still, in a free system where consumers
— not subsidies — decide what is profitable for businesses, farmers would be
more directly accountable for their products. They would grow a wider variety of
crops and adjust to life without artificially cheap corn. And with smaller organic
farms free from big-government regulation, their survival would depend solely on
their ability to lure customers away with
different, specialized goods, a
skill at which they’ve already
proven quite adept. Both types
of farming would prosper to
the extent they satisfied consumers’ demands, and today’s
misallocation and subsidy
waste would disappear. Unfortunately, such freedom in farming remains
unexplored, and it will stay that way while
government holds the keys to the tractor.
This book falls prey to confused thinking,
blaming producers for following the incentives
they’re presented in hamstrung markets.
A trip down the
winding road of the once-small organic
movement reveals that today’s grocery store
“Organic” label no longer necessarily represents the ethics of the original movement. Specifically, with the passage of the
Organic Food and Production Act of 1990,
Congress first allowed the Department of
Agriculture to fix the meaning and standards attached to the term “organic.” The
usual regulatory circus ensued. Large
agribusiness interests lobbied for a loose
definition of the term in order to capitalize on this growing market segment. Initially, meat was considered organic if, in
part, it came from free-range animals; now
the requirement is that the animals have
“access to the outdoors.” Enough synthetics were deemed “organic” that business
could create everything from the organic
TV dinner to the organic Twinkie.
This increased government presence
in the market set off a response by a few
organic true believers who chose to opt out
of the encroaching $11 billion “Big Organic” movement. But from unnecessary safety and packaging standards to a rule that
ORGANIC OR NOT?
56 R EG U L AT I O N S P R I N G 2 0 0 9
However, what can’t be replicated through
such artful prose and clever marketing is
seeing first-hand where dinner comes
from, and knowing exactly how it was
grown or raised.
To many, such personal involvement is
unimportant. But to a growing number of
consumers, it is necessary to have a true
sense of the cost of getting dinner to the
table. For those consumers, a higher price
or an inconvenient drive is worth the trouble for food with which they have a personal connection. And for many small
organic farmers — who could easily plant
corn and collect a subsidy check — the
satisfaction of providing their best efforts
to willing buyers is still worth the extra
cost of jumping government hurdles.
Omnivore disappoints most in Pollan’s
refusal to draw the obvious conclusion
from such facts. He makes the mistake
so many have made, assuming his issue is
too important to be trusted to free-thinking people in a free market, and must
instead be planned from the top down.
Pollan’s disdain for agribusiness and
large corporate farms is obvious, and his
desire for growing numbers of small,
organic farms is palpable. Yet the relevant
comparison is not big versus small farms,
but rather a controlled versus a free system. We know the results of the former: in
Russia it was famine and misery, and in
the United States it has yielded only collusion and misallocation. As to the latter,
economies of scale and increasingly efficient mechanization would likely lead to a
KNOW YOUR FOOD A journey through
The Omnivore’s Dilemma — from the corn
field to the supermarket, and from the
woods to the table — is one that will by
turns make your mouth water and your
stomach turn. Pollan’s descriptions of the
dinners he prepares for family and friends
are worthy of Anthony Bourdain or Ted
Allen. But those depicting chickens
crammed into impossibly small crates, wallowing in their own filth, are closer to
Stephen King. Yet the book presents a valuable chronicle of U.S. farm regulation.
Though the classic liberal reader may not
agree with the conclusions he draws, Pollan
creates a vivid picture both of Big Agriculture and the smaller farms he favors.
What the book does not do is present
any plausible solution to our over-regulated and bureaucratically bloated system
of agriculture. Nor does it provide any
design more likely to be effective in farming than a free market, where people farm
and trade without government stifling
their productive activities or distorting
their incentives.
Perhaps just making us more aware of
what we’re now eating and where it comes
from is enough. I know I’ll be wondering
about all 38 of those mystery ingredients
the next time I bite into a Chicken
McNugget. And for Michael Pollan, that’s
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a good first step.
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The Return of Jimmy Carter
Reviewed by Richard L. Gordon
A DECLARATION OF ENERGY
INDEPENDENCE: How Freedom from
Foreign Oil Can Improve National
Security, Our Economy, and the
Environment
By Jay Hakes
252 pages; John Wiley & Sons, 2008
I
t seemed to me that the candidates in
the 2008 campaign spewed forth
more than the usual amount of economic illiteracy. Among, but far from the
worst of, these was the bipartisan stream
of nonsense about the importance of
achieving energy independence. To make
matters worse, numerous independent
organizations and individuals who should
have known better nonetheless supported
those arguments. Extensive economic
analysis amply supported by historical
experience indicates energy independence
is a stupid idea. The benefits are nonexistent; the costs huge.
Jay Hakes has accomplished the dubious distinction of preparing by far the
best-researched effort in this realm and
reaching some of the worst conclusions.
Hakes is a political scientist who headed
the Energy Information Administration in
the Clinton administration and now heads
the Carter Library and Museum. Thus,
not surprisingly, the book views the Carter
years as a golden age from which we
unwisely retreated. That is the key problem
with the book.
Hakes’s subtitle nicely if unintentionally epitomizes the fault with the revived
goal of independence: politicians are seeking magic from a Wizard of Oz who is, in
fact, a humbug.
Hakes divides the book into two
main parts, the first of which defines the
supposed problem. The first three chapters
are his presentation of energy history from
the start of the Nixon administration
onward. That is followed by four overwrought chapters on the overriding issues:
INSIDE
Richard L. Gordon is professor emeritus of mineral
economics at Pennsylvania State University.
the military implications of oil dependence, global warming, the “Magic and Limits of Market-Based Solutions,” and ideological blinders. The book’s second part
offers “solutions” — stockpiles, more fuelefficient automobiles, alternative fuels,
electric vehicles, energy taxation, conservation, and “Hail Marys”(his term).
Hakes errs in more than the usual ways.
His first security concern is supply disruptions. In this, he blows his case before
he even gets going, killing the cause of
energy independence. A short supply disruption once a decade is hardly justification for insanely
costly energy independence.
He, moreover, shows no
recognition of the alleged
macroeconomic externalities
that provide the only potentially valid market-failure justification for intervention in a
crisis. By doing so, he ignores
the government-failure problem that precludes optimum
market response to crises.
Irrational hatred of windfall profits prevents firms from realizing, among other
things, the profits in a shortage period
that would justify optimal inventories (and,
as President Obama fails to note, optimal
levels of investment in production capacity). The public inventory about which
Hakes is so enthusiastic suffers from
restrictions on disposal also because of
enmity toward the windfalls that stockpilers would make. His solution of an independent supervising body to oversee stockpiling has numerous defects. It harkens
back to the vision of benevolent, omniscient experts — a vision loved by advocates
of intervention and discredited by many
impartial studies. Hakes’s claim that such
experts could operate as impartially as the
Federal Reserve ignores how rules, rather
than discretion, have become popular in
the literature on monetary economics.
Hakes does consider the cost of military
intervention in oil-producing regions.
However, doubts exist that energy independence will reduce military expenditures
at all, let alone to an extent that would
cover the costs of independence. As long as
the United States remains the dominant
world power, it will have major military
requirements until all forms of threat are
removed. Energy independence that leaves
the rest of the world oil-dependent will
keep oil as much (or little) an influence on
defense posture as with free imports.
Hakes’ three history chapters cover, first,
from the end of World War II to the Nixon
years, then the Ford, Carter, and (early)
Reagan presidencies, and finally the most
recent years. In these chapters he is at war
with himself and he ignores analyses that
undermine his argument. A core defect is
that while he cites M.A. Adelman’s classic
book on world oil, Hakes completely
ignores Adelman’s arguments. The central neglect is misunderstanding of the incoherence of U.S.
energy policy. Up to the Nixon
years, the goal was to balance
the advantage of using cheap
foreign oil with political pressures to preserve high-cost,
small-scale domestic producers. The cost was undermining
the emergence of a more competitive world oil industry. Better policy might have prevented OPEC-country price
pressures. Hakes similarly neglects Adelman’s contention that Saudi Arabia’s
embargo actions were key despite the country’s claims to the contrary. He also overlooks Adelman’s demonstration that the
1973–1974 oil supply cuts were intended to
exert economic pressure on the West rather
than to punish U.S. support for Israel.
Hakes does eventually recognize that the
ability to alter trading patterns precluded
limiting the supply losses to the supposed
target countries.
In his Carter-period discussion, Hakes
badly distorts the explanation of oil use
decline from 1978 to 1983. In particular,
he rightfully notes that a large and permanent part of the drop was the broad discontinuation of the use of oil to generate
electricity. He wrongly attributes the shift
to coal- and nuclear-fueled generation to
federal mandates, ignores the rise in gasfired generation that energy legislation
unwisely tried to prevent, and seems
unaware of increased exports, recorded in
reports to the U.S. Energy Information
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Agency, of coal-fueled Midwestern electricity to the Middle Atlantic states. Moreover, Hakes attributes residential and commercial reductions in oil use to
conservation measures and ignores the
shift of consumers to natural gas. He says
nothing about the large decline in industrial oil use.
The dependence chapter largely discusses the invasion of Iraq as an alleged
consequence of dependence. The global
warming chapter is a routine presentation
of the case for urgent action; he does not
advance the case beyond Al Gore in 1992.
A central fault of the book and the
whole literature on energy independence
is the neglect of the underlying economies.
Hakes is particularly vulnerable because he
purports to deal with that economics. His
chapter on the free market recognizes the
virtues of the market, but follows them
with dubious assertions that conservation mandates make the market easier to
decontrol. He credits the nuclear power
program with making a contribution to
this. He then employs the canard that
free-market economists ignore the existence of externalities. The reality is that
free-market economists are more skeptical
than Hakes about the level of prevailing
externalities. He does not help matters by
including foreign-government ownership
of oil as an externality instead of simply a
monopolistic market failure.
He does not help matters by stating,
“Beware of economists whose research is
funded by business groups that hate all
forms of regulation.” This gratuitous
insert extends absurdly the standard distraction interventionists use to attack promarket arguments. The principal defect of
such contentions is that causation is
reversed. The position of the researcher
determines the research support; credible
supporters of a position are sought
because sellouts are readily determined.
Business support, in any case, is no more
biased than that of governments or nonbusiness advocacy groups. Even if we generously read “group” to mean persons or
organizations rather than just trade associations, his “regulation haters” are virtually nonexistent. Few of the businesses or
executives supporting free-market advocacy are as strongly and consistently antiintervention as those they support. Most
relevant for Hakes, the best study ever
58 R EG U L AT I O N S P R I N G 2 0 0 9
done on oil-import dangers was an effort
by Douglas Bohi and Michael Toman that
was funded by the American Petroleum
Institute, hardly a bastion of free-market
ideology. (A nice irony here is the authors’
employer at the time, Resources for the
Future, was so scared of attacks on industry support that Bohi and Toman had to
prepare the book as an outside activity. In
contrast, RFF seems unaware of how its
dependence on government grants has
distorted its work.) Bohi and Toman are a
prime source of doubts about import dangers and should be consulted by those
who wish sound analysis.
Hakes’s chapter on policymakers’ ideological blinders again engages in distortions to indicate the left and right are
equally culpable. He correctly faults the left
for obstructionism. His critique of the
right is repetition of his nonsense claim
about neglect of externalities. He adds a
silly assertion that personal dislike of Al
Gore drives criticism of Gore’s writings, as
if reading them were not enough to produce rejection.
The second part of the book is a collection of the usual bad ideas for radical
changes in energy use. The prior topic listings suffice to make the content clear.
The one curiosity is that he wants both
carbon limit mandates and either taxes
or marketable permits, either of which
would make mandates redundant.
Writers of this ilk betray their inadequacies by little errors. Hakes’s notes present the economic howler that “the reluctance of OPEC producers to increase
output rests less on fears of oversupplying
the market than on a desire to keep prices
from falling.” Were the EIA properly
staffed, eight years there should have made
him aware that prices and quantities supplied have a one-to-one relationship. R
Power Communication
Reviewed by Richard L. Gordon
DEREGULATION, INNOVATION AND
MARKET LIBERALIZATION: Electricity
Regulation in a Continually Evolving
Environment
By L. Lynne Kiesling
189 pages; Routledge, 2009
D
iscontent with the state of the
electricity market has inspired a
steady stream of writings about
how best to improve the situation. The
writings are dominated by discussions,
usually from the same able but convention-bound economists, recognizing the
defects of current market regulation, followed by proposals for incrementally
improving that regulation. The most
recent example to reach me is a special
issue of the Energy Journal.
However, going back at least to Richard
Posner’s classic but badly under-cited 1969
Stanford Law Review article “Natural
Monopoly and its Regulation,” another
view is that regulation is a flawed concept
from which public policy should turn. PosRichard L. Gordon is professor emeritus of mineral
economics at Pennsylvania State University.
ner’s basic case stated the points that
remain central (and many that do not).
Even if natural monopoly exists, the
monopolist’s ability to engage in price discrimination means the absence of efficiency losses. The only consequence of monopoly is a change in income distribution. That
alteration is too small and of too unclear
impact to justify intervention; action on a
single commodity at the regulatory commission level is not the best way to deal
with redistribution. Moreover, even if regulators had efficiency-raising public interest objectives, they lack the ability to attain
those ends. Finally, rent-seeking forces may
lead to pursuit of less desirable objectives.
Some subsequent writers have expanded on this view and, in particular, suggested that the presumption of natural
monopoly was unjustified. Northwestern
economist L. Lynne Kiesling’s thoughtprovoking new book Deregulation, Innovation, and Market Liberalization adds to this
literature. She takes up the classic debate
in public utility economics over the optimum way for suppliers to interact with
consumers — that is, to use real-time pricing and other mechanisms to moderate
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consumer use at times when demand is
greatest and grid congestion is worst. Her
case boils down to rejection of the skepticism rampant in the more conventional
writings about the ability to implement
such interaction. Kiesling argues that
recent advances in computer technology
have dramatically lowered the cost of realtime producer-consumer
communication, making it
possible to implement those
technologies on a large scale.
The book’s introduction concentrates on its
unifying theme that the concept of regulated natural
monopoly is ill-suited to dealing with industries that experience rapid technical
progress. That flaw has
become intolerable in an era when such
change could profoundly increase power
industry efficiency. Chapter 2 provides an
all-too-standard capsule history of the
industry, its regulation, and the relevant
theory. Kiesling’s history is mostly solid,
but it has a few standard but still bothersome flaws. The most important of these is
her failure to discuss the forms of price
discrimination that can produce efficient
outcomes in a natural monopoly and that
are usually employed, and stressing what
she recognizes as impractical: the loss-minimizing elasticity-based markups beloved by
many theorists. Her thumbnail description of the industry sticks too heavily to an
entity-count approach. Such a technique
underplays the fact that the industry is
dominated by the generation, transmission, and distribution by the private sector,
which has far fewer participants than the
public and cooperative sectors. (Moreover,
the count of private firms, as usual, is bloated by reliance on sources that treat subsidiaries are separate operations.)
In Chapter 3, she deals with the desirability of decentralized decisionmaking and
the need to design institutions that facilitate such decentralization. For the first
part of the discussion, she invokes the arguments in favor of decentralization that are
advanced in Austrian economics; she uses
new institutional economics for the rest.
The treatment is too long for an academic
audience, but it may not be lucid enough
for the nontechnical audience. However, it
INSIDE
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does convey the essence of the argument.
The remaining chapters present her
case that communication between utilities
and their customers will promote large
efficiency gains. These chapters are what
justify attention to the book. The discussions examine the implications of interactions with consumers for resolving the
critical problems of the electricity industry.
In Chapter 4, she nicely
presents both the theoretic
argument for communication
with consumers that allows
prices to respond to changing
supply/demand conditions
and the successful results of
experiments with such communications. Then Chapter 5
argues for reorganizing transmission into separate firms
that are joint ventures of electricity retailers. Chapter 6 briefly indicates the shortrun advantages of communication in promoting reliability. Chapter 7 turns to why
this approach is far superior to the currently favored policy of creating markets for
capacity to ensure the long-run optimal
reliability of the power industry. This last is
a particularly clear example of the implications of effecting continuous communications with consumers. The resulting
price response generates precisely those
revenues unavailable when prices stay fixed
while loads increase to peak levels. Capacity markets are an effort to compensate
for such revenue losses. Price flexibility, if
feasible, is preferable because it is based
on direct, rather than indirect, evidence of
demand conditions. These chapters are all
solid presentations of the case.
Chapter 8 is extremely problematic
because of its equivocation. Her treatment
of the public-good nature of reliability
confusingly argues that reliability is simultaneously both a public good and a common-pool good. As she correctly indicates,
a public good is one that, if provided, is
freely available to everyone and such availability is not affected by the level of individual use. A common pool is one that, if
provided, is freely available to everyone
but its availability is affected by the level of
individual use. (National defense is the
classic example of a public good; fisheries
and oil and gas fields are among the key
common-pool resources.) The common-
pool aspects of reliability are clearly
explained. The discussion of public goods,
in contrast, is murky and incomplete. In
particular, she neglects Coase’s caution
about lighthouses; while public in theory,
they were initially provided privately
because government lack of interest was
more of a problem than the free riding. As
nearly as I can determine, Kiesling is dealing with the classic problem of when the
transition is made from underuse and an
optimum price of zero to congestion and
an optimum positive price. In any case, an
unequivocal contention that reliability is
a common-pool resource seems plausible
and should have been made. This would
have led to a less equivocal conclusion
about the undesirability of regulation.
While Kiesling’s is an
attractive and plausible argument, caution
is necessary. The idea that more flexible
pricing is desirable in principle is longstanding and the subject of a substantial literature. The contention that regulation
impeded implementation appeared at least
as early as Posner’s 1969 article. The contention that computer technology had
reduced the costs of communications to a
level where it was efficient was the core of the
1988 book Spot Pricing of Electricity by Fred
Schweppe, Michael Caramanis, Richard
Tabors, and Roger Bohn. Neglect of doubts
about greater communication is not a critical fault, but neglect of Posner’s wider arguments is. He leads to the view, which he
refrained from presenting, that regulation
has no redeeming virtues. Total deregulation
of electricity is justified simply by allowing
freedom to experiment. It would be a welcome bonus if responsive prices emerged.
The book is clearly an effort to provide an elucidation for non-specialists of
the case for a less regulated, more flexible
electricity market. The discussion is kept at
a level appropriate for such an audience. It
is too bad that this publication is a $130
book directed at academic libraries.
Any effort to break from the assertions
that regulation is desirable is welcome.
One such as this, which thoughtfully presents and justifies some interesting alternatives, is particularly helpful. One would
hope at a minimum that the electricity
regulation establishment would be
inspired to depart from its cavalier neglect
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of such arguments.
CONCLUSION
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Laws Trumping Laws
Reviewed by Paul H. Rubin
THE PREEMPTION WAR: When Federal
Bureaucracies Trump Local Juries
By Thomas O. McGarity
368 pages; Yale University Press, 2008
“P
reemption” deals with the relationship between state and federal law. A federal law preempts
a state law if the federal law overrides the
state law. Preemption comes in two flavors:
In one, federal regulatory law overrides
state regulatory law, so that a state cannot,
for example, pass a more stringent regulation than that passed by the federal government. In the other, a federal law stops
a state common law court from finding
liability and awarding damages under tort
if a defendant has complied with some
federal regulation. The Preemption War deals
with the second type of preemption.
This issue may seem dull, but it is now
quite newsworthy and important. Last
November, the Supreme Court heard
arguments in Wyeth v. Levine, a case regarding exactly this issue; a decision is due by
June. (I coauthored a brief with several
other economists in favor of preemption in
this case. My work was unpaid.) News
reports indicate that trial lawyers, a part of
President Obama’s coalition, seek legal
changes in the current law regarding preemption. Thus, there are ongoing developments regarding this issue. This book is
a guide to these issues (although if Congress changes statutory language in
response to pressure from the trial lawyers,
the issue may become moot.)
Those of us in favor of limited government are often conflicted over issues of
preemption. On the one hand, principles
of federalism would argue against preemption because there are clear benefits to
those principles in our system. The benefits have to do with both local control
and with what economists call the
“Tiebout effect,” which allows citizens to
move to jurisdictions that more closely
Paul H. Rubin is the Samuel Candler Dobbs
Professor of Economics and Law at Emory University
and senior fellow at the Technology Policy Institute.
60 R EG U L AT I O N S P R I N G 2 0 0 9
favor their preferences. On the other hand,
in a national market there are benefits to
uniformity. Moreover, in many states, tort
law itself is likely to find liability when
there is no economic justification for liability, and also likely to award excessive
damages. The damages may be paid
through higher prices in all states for some
product, so one state may use its tort law
to extract money from consumers in other
states. Thus, we have conflicts between
several flawed systems — state and federal
regulatory systems, both of which are likely to be overly regulatory, and state tort systems, which are also likely to
be excessive. (The libertarian
solution is to rely much more
on voluntary contract in all
of these issues than is the
case now, but that is a story
for another day.)
The book’s
author is Thomas McGarity,
a distinguished law professor at the University of
Texas. McGarity does a nice
job of explaining these issues. Because he
is a law professor, the book tends to
focus on technical legal issues and on the
details of particular cases more than
many readers might prefer, but for a
patient reader it does explain the topic.
The first three chapters explain the legal
and political issues involved. The key
case was the 1992 Cipollone v. Liggett Group
Inc., which involved cigarettes. This was
apparently the first case in which a federal law was viewed as preempting a state
tort law claim.
Much of the book is an examination of
preemption debates in specific industries
and particular forums. Chapter 4, “The
Preemption War in Courts,” examines litigation regarding preemption in transportation, medical devices, pesticides, jobrelated accidents, consumer products, and
credit reporting. Chapter 5, “The Preemption War in Congress,” examines particular lobbying battles, including those
regarding guns, vaccines, mtbe (a chemiA LOOK INSIDE
cal additive in gasoline that may leak into
ground water), and the “patient’s bill of
rights,” which would have regulated
hmos. Chapter 6 deals with federal agencies’ attempts (largely in the second Bush
administration) to achieve preemption in
regulating railroad crossings, prescription
drugs, automobile roof crush regulations,
and mattress flammability regulation.
The final four chapters discuss policy
issues. Chapter 7 examines the strengths
and weaknesses of courts and regulatory
agencies. McGarity concludes that neither type of actor has an overwhelming
advantage, so there is room for both, but
that neither courts nor regulatory agencies
should overreach. Chapters 8 and 9 discuss, respectively, the case for and against
preemption. (In the case against preemption, there is only a brief mention of federalism.) The final chapter
proposes some ways of ending the preemption wars.
McGarity suggests that Congress should fix the issue, and
provides some suggestions for
how to do so.
The book is thorough and
well argued. McGarity is neither a law-and-economics
scholar nor libertarian in
belief; as a result, there are
some arguments that readers
of this review might disagree with. One of
the most important is the role of what he
calls “corrective justice” and what law-andeconomics scholars call compensation. The
two major functions of the tort system are
deterrence (called in this book “preventive
justice”) and compensation. Law-and-economics scholars generally agree that the
tort system is a very bad way of arranging
compensation compared with direct firstparty insurance. This is because the administrative costs of the tort system (also known
as legal fees) are about 50 percent or more
of the amount awarded; first-party insurance premiums are on the order of 5–10
percent. Given this, it is commonly claimed
that the only efficient function of the tort
system is deterrence. McGarity argues that
the courts have been neglecting the compensation function of the tort system in
favor of deterrence, and that achieving corrective justice through compensation is an
important goal of any policy. As a traditional legal torts scholar, he views com-
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pensation as important; as a law-and-economics scholar concerned with efficiency,
I think that the tort system should not pay
attention to compensation.
McGarity summarizes the particular
facts in many cases. There are two problems with this approach (although it is
natural to a law professor, immersed in the
details of particular cases): First, each case
is merely an anecdote, and has little importance in itself; nonetheless, the book is
much longer because of this approach.
Second, although seemingly neutral, this
approach is biased. In examining victims
of policies (for example, a consumer
harmed by a drug), we see the downside of
some action, but we do not see the other
side of the issue — those consumers who
benefit from the product. Moreover, if
Page 61
state tort suits are added to the federal regulatory system, some products are not
produced or are made more expensive, so
that some consumers do not use those
products. We do not see the harmful
effects on those consumers.
In sum, this book is a rather lengthy
guide to an important if fairly obscure
branch of federal-state legal relationships.
This branch of law is now under extreme
pressure and is likely to change in important ways. The book explains these issues.
However, readers should keep in mind
that Professor McGarity does not view
these issues through either law-and-economics or libertarian lenses. Nonetheless,
the book is sufficiently objective that readers with these preferences can understand
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the issues.
Regulating Indiana Jones
Reviewed by Jeremy Lott
WHO OWNS ANTIQUITY?
Museums and the Battle over Our
Ancient Heritage
By James Cuno
228 pages; Princeton, 2008
T
hose who read Who Owns Antiquity?
hoping for the answer to its titular
question will come away unsatisfied. The book makes one sweeping, unenforceable claim of a common artistic inheritance that doesn’t come close to settling
the issue. It comes near the end, when
author James Cuno writes of his transformative visit to the Louvre in Paris. He
found that he could identify with the many
ancient exhibits “as exquisite works of
human manufacture. There was no sense
that they belonged to anyone. They were
works of art, no more anyone’s property
than the great ideas that have come down
to us over the centuries. They weren’t in any
meaningful way possessible.”
Oh, horseradish. Obviously they were,
and are, “possessible.” Museums have
alarms and security guards for a reason. All
Jeremy Lott is an editor at Capital Research Center
and author of The Warm Bucket Brigade: The Story
of the American Vice Presidency (Thomas Nelson,
2008).
of the items in the Louvre are owned by
the museum or by institutions and collectors that loan out items. That only
makes sense to ensure visitors look but
don’t touch, and don’t make off with the
unburied treasures. Cuno argues that
museums are different than
private collectors because
museums hold antiquities
“in trust” for the public, but
the Louvre still retains the
rights to control or even — in
extraordinary circumstances
— to sell off exhibits. If that
doesn’t constitute possession, this reviewer is at a loss
to understand what would.
Harrumph. The book is
an invaluable if frustrating
essay against many protectionist cultural
property laws. Invaluable because it gives
a good, detailed overview of how such
laws came about, and it cuts through the
rhetoric and takes incentives and interests
seriously. In that, it resembles a public
choice history of the conflict. Frustrating
because, as a representative of one of the
interested parties, i.e., museums (the
author is the president and director of the
Art Institute of Chicago and the former
director of Harvard’s Courtland Institute
of Art), Cuno only hints at the opportunities lost because of the overregulation of
antiquities.
ACTORS AND INCENTIVES To get a rough
understanding of the current debate about
cultural property laws, we might create a
spectrum line with five points spaced out
across it. We’ll label those points, in order:
nation-states, archaeologists, museums,
dealers, and collectors. Generally, those
interests on the left side of the spectrum
favor much more restrictive laws. Those on
the right side want a freer market. And
museums find themselves in a tough spot.
The antiquities collections that museums once amassed could not be put
together today. Why not, you might wonder. Because it has become illegal to transport many items across state lines either at
all or without the express permission of
bureaucrats who believe the international
antiquities market is tantamount to theft.
Museums used to be able to purchase
antiquities from international dealers or
fund archaeological digs and keep about
half the items found, through a system
known as “partage.”
In the last 50 years, however, nations have
enacted progressively more restrictive cultural property laws that ended the old system, severing the close connection between
archaeologists and museums.
Recall the refrain old-school
archaeologist Indiana Jones
would snarl as he snatched
some treasure out of the hands
of an evildoer who might profit from it: “That belongs in a
museum!” Archaeologists of
today, Cuno explains, are different because they depend on
states for the permission to
excavate and often the funds
to do so. Granted, they may call
for more laws and tighter enforcement for
a number of reasons, but it doesn’t hurt to
get in good with authorities who can deny
permits or shut digs down.
Archaeologists, once well-funded, now
have to scrimp for funds, and some of the
practices they have endorsed make their
discipline less effective. Cuno points out
that the Rosetta Stone was salvaged from
building material, sold through an antiquities dealer “unprovenanced” — without
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IN REVIEW
fully excavated along with the chain of
sale. That would render it highly suspect,
if not useless, to archaeologists today. Yet
without it we might never have translated
ancient Egyptian hieroglyphs. Imagine the
whole field of Egyptology, stillborn.
The new regime has hurt most of the
players on our spectrum. Museums have
had their ability to put together new collections much diminished. Scrupulous
dealers and collectors are lumped in with
the less scrupulous ones. They face suspicion and onerous regulation. Those willing
to skirt the laws can make a good deal of
money clandestinely digging up antiquities to sell to unscrupulous collectors, who
have greater incentive to keep them well
out of the public eye. The money makes
archaeologists even more likely to have
their sites looted. You could even make a
good case that states have been hurt by
protectionist cultural property laws. After
all, many of the museums in poor coun-
tries today are filled with artifacts that
were dug out of the ground and documented when partage was allowed.
Cuno acknowledges some ill effects of
this setup, but he remains more interested
in making the case that the laws themselves are unjustified. He argues that modern nation-states are interested in cultural protection laws for what he takes to be
very bad reasons: nationalism and militarism, chiefly. This is not wholly convincing, but the author does come up
with some fun examples to argue his
point. He reveals, for instance, that one
Chinese firm that routinely spends huge
sums to purchase Chinese antiquities
abroad and bring them back to China is
an offshoot of a Chinese arms manufacturer — The Poly Group — that was spun
out of, and still has close ties with, the Chinese army. It appears the modern Chinese military still attaches great importance to those Qing Dynasty bronzes. R
Still-Relevant — Perhaps
More So
Reviewed by David R. Henderson
THE ROAD TO SERFDOM
By Friedrich Hayek
320 pages; University of Chicago Press,
2007
W
hy write a review of a book
that was first published in
1944? Because it’s still relevant
today. Friedrich Hayek wrote The Road to
Serfdom during World War II to warn the
West that intellectuals and policymakers
in traditionally free countries, including
Britain and the United States, were repeating the journey that their counterparts in
totalitarian countries, especially Germany
and Italy, had traveled before the war.
That message resonates amidst today’s
War on Terror, return to regulation, energy plans, financial sector bailouts, and
David R. Henderson is a research fellow with the
Hoover Institution and an associate professor of
economics at the Graduate School of Business and
Public Policy at the Naval Postgraduate School in
Monterey, California. He is the editor of The Concise
Encyclopedia of Economics (Liberty Fund, 2008).
62 R EG U L AT I O N S P R I N G 2 0 0 9
successive economic “stimulus” packages.
In the United States today,
the intellectuals’ and the public’s belief in freedom seems
to be in decline and certainly
freedom itself is in decline. On
the civil liberties side, government agents monitor phone
calls, often without a court’s
permission; swat teams
invade people’s homes; and a
federal government agency
insists that we get its permission before we
board commercial flights. In economics,
the federal government has become a
much bigger decisionmaker in investments, choosing — regardless of investor
or customer desires — to give billions of
dollars to various firms. And both George
W. Bush and Barack Obama embrace the
“fatal conceit,” to use one of Hayek’s
terms, that government can allocate hundreds of billions of dollars better than
the owners of those resources can.
Of course, things are not proceeding
the same as they were when Hayek wrote.
But as Mark Twain once noted, “History
may not repeat itself, but it does rhyme a
lot.” The dangers in World War II
stemmed from an explicit belief in central
planning. Although the belief in central
planning is less prevalent today, you
wouldn’t know it from looking at the
government’s policies, which would make
sense only if the case for central planning
made sense. Hayek’s book is relevant
today, not just because it tells the intellectual roots of totalitarian governments,
but also because some of the same mistakes in thinking that Hayek criticizes so
effectively are apparent in people’s thinking today.
Take the word “privilege.” Hayek points out that the word was
normally used to talk about special treatment that some people received simply
because of their status. Hayek notes, for
example, that the right to own land had, at
one time, been reserved for the nobility.
That was privilege. But the term, writes
Hayek, came to apply to anyone who
owned property, even though virtually
every adult’s right to own property had
become widely accepted. We see something similar today. Those who have a
great deal of wealth are
called “privileged,” even if
they earned their wealth
without using any political
pull. Those who are poor,
on the other hand, are called
“underprivileged,” even if
their being poor has nothing to do with having less
than the average amount of
privilege. Hayek understood
that such distortions in
meaning matter.
And consider the following passage:
DISTORTIONS
The younger generation of today
has grown up in a world in which
in school and press the spirit of
commercial enterprise has been
represented as disreputable and
the making of profit as immoral,
where to employ a hundred people is represented as exploitation
but to command the same number as honorable.
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Does this sound as if it were written
today? The misunderstanding of profit
and production has been around for
generations. Thus, one can understand
why advocates of freedom have such an
uphill fight.
One of Hayek’s chapters that speaks
most to today is his “Why the Worst Get on
Top.” In it, he explains why the politicians
in a totalitarian system will tend to be the
most ruthless people in society. One reason
he gives is “that it is easier to agree on a negative program — on the hatred of an enemy,
on the envy of those better off — than on
any positive task.” We see this even in nontotalitarian countries with a large amount
of government control, such as the United
States. Think about how Al Gore, for example, excoriated “the top one percent” of
the income distribution during his 2000
presidential campaign. Hayek quotes the
late University of Chicago economist Frank
Knight’s memorable statement that “the
probability of the people in power being
individuals who would dislike the possession and exercise of power is on a level
with the probability that an extremely tender-hearted person would get the job of
whipping-master in a slave plantation.”
Again, to some extent, this applies even to
semi-free countries such as the United
States. The last U.S. president I remember
who had any reluctance about exercising
power was Ronald Reagan. Every president since seems to have loved power.
On power, Hayek also takes on the idea
that whether the state runs the economy or
we have a free economy in which some people are very wealthy, the amount of power
is the same and the only issue is its distribution. The government’s power, he writes,
“is a power which is newly created and
which in a competitive society nobody possesses.” Hayek points out that the power a
multimillionaire “who may be my neighbor
and perhaps my employer” has over him “is
very much less than that which the smallest fonctionnaire possesses who wields the
coercive power of the state and on whose
discretion it depends whether and how I am
to be allowed to live or to work.”
Many people believe that economic values are less important to them than other
things. But Hayek points out that the reason people believe this “is precisely because
in economic matters we are free to decide
what to us is more, and what less, impor-
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tant.” Take away our freedom to make
those decisions and economic values
become obviously important. Hayek
writes, “[W]hoever controls all economic
activity controls the means for all our ends
and must therefore decide which are to be
satisfied and which not.” Or, as the late
Roy Childs, Jr. once wrote in paraphrasing
Hayek, when the state has total power
over the economy, political power becomes
the only power worth having.
Interestingly, even Hayek, for all his
pessimism when he wrote the book, failed
to predict one significant intrusion on
liberty that has happened since. Hayek
writes, “[W]ithin the nation few would
advocate that the richer regions should be
deprived of some of ‘their’ capital equipment in order to help the poorer regions.”
Among those few were the officials in the
Canadian government who, starting in
the 1950s, introduced a plan to transfer
resources from “rich” provinces to “poor”
provinces. In 2008, those payments were
$13 billion, which was over one percent of
Canada’s gdp.
Having mentioned Hayek’s pessimism,
I hasten to note that he almost always
goes on the offensive. While he is polite
and generous to a fault toward those with
whom he disagrees, he is not defensive.
Instead, in page after page, he points out
mistaken thinking and the horrible problems that arise from extensive government
economic control. Throughout it all, he
maintains a subtle sense of humor. Consider Hayek’s statement about one of the
main British totalitarian intellectuals: “It
deserves to be noted that, according to
Professor [Harold] Laski, it is “this mad
competitive system which spells poverty
for all peoples, and war as the outcome of
that poverty” — a curious reading of the
history of the last hundred and fifty years.”
Of course, many important things
today are different from the way they were
when Hayek wrote. Included in the list
must be the messianic devotion to “environmentalism” and the U.S. government’s
willingness to intervene in other people’s
disputes around the world and even, as in
the case of Iraq, to start such disputes. Is
it time for an advocate of freedom to write
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a new Road to Serfdom?
Sawing Off the
Ladder to Success
Reviewed by George Leef
STEALING FROM EACH OTHER:
How the Welfare State Robs
Americans of Money and Spirit
By Edgar K. Browning
226 pages; Praeger, 2008
I
n the Sherlock Holmes short story
“Silver Blaze,” the key to solving the
case was recognizing that something
didn’t happen — the dog didn’t bark in
the night. Few people (like Dr. Watson) are
inclined to think about the importance of
things that did not happen, but we can
make great mistakes if we fail to do so.
Texas A&M economics professor Edgar
Browning’s new book Stealing from Each
Other implores us to think like Holmes
did and economists do when they conGeorge Leef is director of research of the John W.
Pope Center for Higher Education Policy.
template opportunity costs, namely what
we give up when we choose to do X rather
than Y. Specifically, he wants us to consider the opportunity costs of our vast
federal welfare system. What do we give up
when we choose to have the federal government engage in widespread income
redistribution? What does not happen?
Browning’s answer is: a great deal of
output. He estimates that our GDP would
be at least 25 percent larger if it weren’t for
our host of programs and taxes comprising
the welfare system. He regards this as a
bad tradeoff and makes a powerful case for
abolishing federal income transfers and
adopting a “just say no” policy toward any
suggestions for more of them in the future.
(Browning is fine with states running
whatever welfare programs they want; he
respects the Constitution’s federalist plan.)
“A non-redistributive federal government,”
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IN REVIEW
he writes, “would permit more of the productive potential of the American people to
be realized.” There’s the non-barking dog
he wants us to concentrate on.
How does the welfare system cause us
to lose output? Browning counts the ways:
First, welfare recipients are
strongly deterred from working by the high implicit tax
rates they face on income
they earn. Browning walks us
through a typical case: a single mother with children who
lives in Pennsylvania. She is
eligible for welfare benefits
under various programs that
amount to $19,217. What if
the woman finds a job and
earns some money? Suppose
she lands a part-time job and earns $5,000
during the year. Is she $5,000 better off? No
— after factoring in the reductions in her
benefits because of her earnings, she ends
up with disposable income of $18,253.
The part-time job actually makes her worse
off. Browning proceeds to show that she
would need to get a job paying $30,000 per
year before she would end up financially
better off than not working and living
entirely at the expense of taxpayers. Even at
that income, her gain is less than $700 for
all the trouble of working.
It is no wonder that there has been little improvement in the living standards of
the poor. They’re essentially trapped in a
barely tolerable existence of government
handouts.
Is that just economic theory? Browning
cites data showing that working among
poor people has decreased as welfare has
become more generous. “In 1960,” he
reports, “nearly two-thirds of households in
the lowest income quintile were headed by
someone who worked (at least part time). At
that time, welfare expenditures were under
1 percent of GDP. In 2005, when welfare
had increased to about 5 percent of GDP,
the proportion of workers in the lowest
income quintile had fallen by half.”
For people with poor labor market
skills, welfare has thus sawed off the bottom rungs on the ladder to success. It
ensures that we have a more-or-less permanent class of idle, often resentful people. That circumstance is unhealthy, both
economically and socially.
Social Security is another bad policy
64 R EG U L AT I O N S P R I N G 2 0 0 9
when you consider the hidden costs. What
people see (and politicians make sure they
do) are the checks flowing from the U.S.
Treasury to help Grandpa pay his bills.
What they don’t consider is how much he
would have saved in the absence of Social
Security. What if he had
invested his taxes in stocks
and bonds, thus providing
more capital for the economy? Answer: he would enjoy a
higher return than Social
Security will pay and the economy would have grown faster.
Browning estimates that
Social Security has reduced
GDP by 5 to 10 percent. Further, the higher rate of return
on private investments would
easily cover the cost of health insurance,
thus eliminating the “need” for another
vast federal program, Medicare.
There are other villains, too. Unemployment insurance taxes lower the paychecks of
all workers to provide the funds that cover
unemployment benefits for workers who
lose their jobs. Since the standard duration
of eligibility is 26 weeks, many workers wait
until their benefits are exhausted before
seriously looking for new jobs. Moreover,
there is a perverse redistributive effect: often
it is lower-paid workers who have steady
employment (e.g., retail cashiers) and higher-paid workers who have frequent spells
of unemployment (e.g., construction workers). It’s hardly equitable to tax the former
for the benefit of the latter, but we do. If we
didn’t have a government unemployment
insurance system, workers would probably
save money for the possibility of a layoff.
That money, productively invested and
therefore contributing to economic growth,
would be theirs. It would provide a nice
nest egg for workers who go through their
careers with little unemployment. On the
other hand, unemployment taxes, like Social
Security taxes, do not accumulate wealth for
the worker who pays them.
Browning’s criticism of the minimum
wage as a job destroyer is right on target.
However, I think he goes astray in arguing
that our immigration policy is essentially
an income transfer program from lowpaid native workers to the business owners
who employ immigrants. He cites studies
that indicate that by allowing immigration, native low-wage workers have their
earnings reduced by about 4 percent. That
may be correct, but I cannot see that a
failure to prevent labor market competition is the same as an income transfer
program. Immigrant workers no more
steal jobs from workers who are American
citizens than imported goods steal sales
from domestic manufacturers.
BICKERING Otherwise, Browning’s case
is rock solid. Our 75-year dalliance with
federal income redistribution has made us
a poorer country than we would otherwise
be. It has also made us a far more politicized and contentious one. Browning
observes:
By their nature, transfer programs
ensure that people have diametrically opposed interests, and opposing
interests are often divisive. Social
Security pits the young against the
old, the federal income tax positions
the wealthy against the middle class,
affirmative action sets whites
against minorities, and so on.
Political bickering and demagoguery
flourish in the hothouse of redistributive
politics. James Madison’s counsel on the
evils of faction comes readily to mind.
Furthermore, the redistributive state
has the unhealthy (but again mostly
unseen) consequence of encouraging rentseeking and redistributive factionalism
among society’s non-poor. People see welfare benefits flowing to the poor and
think, “I pay a lot in taxes, so why shouldn’t I get something too?” The result is
that D.C. and the state capitals are overflowing with lobbyists grubbing political
favors and subsidies for every imaginable
trade association. Browning doesn’t
expressly make this point, but the existence of welfare for the poor provides the
smokescreen for welfare for the rich. Like
a magician misdirecting the attention of
his audience, politicians made a big spectacle of their proclaimed “compassion”
for the poor while slyly slipping billions to
well-heeled interest groups.
Browning reads the minds of egalitarians who might downplay the sacrifice
involved here because having more “stuff”
— the GDP loss — isn’t really important. Of
course, some of the increased output would
go to poorer people who would have higher incomes if we abandoned welfare, but
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there is more to higher productivity than
just cell phones and sneakers. Browning
reminds readers, “Invariably, higher
incomes are associated with better health
and longevity, greater artistic as well as scientific achievements — it’s not just about
‘things.’” Among the benefits of greater
overall societal wealth is increased security
and ability to respond to unforeseen events.
Had the people living around New Orleans
in August 2005 been wealthier, they could
have coped better with Hurricane Katrina.
I must also commend Browning for
not making his book exclusively about
the economics of redistribution. He also
questions its morality. He contends that
when the state taxes Person A in order to
transfer the money to Person B, it is stealing. The fact that it’s accomplished
Page 65
through democratic politics doesn’t
change the morality at all. And to those
who are inclined to view wealth accumulation by free market activity as morally
suspect, Browning replies that in the market, rewards correspond to the individual’s contribution to the betterment of
other people’s lives. Come up with a product that millions want very much and you
earn a lot. If you do nothing, you earn
nothing. Overall, that’s pretty fair.
It may be politically impossible to
escape from the quicksand of the redistributive state, but Professor Browning
has made it clear that everyone would
benefit if we could do so — everyone except
for the interest groups that have a stake in
maintaining the status quo. There’s the
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real problem.
Legislating in the Courtroom
Reviewed by George Leef
Case Western Reserve) write:
REGULATION BY LITIGATION
By Andrew Morriss, Bruce Yandle, and
Andrew Dorchak
282 pages; Yale University Press, 2008
F
rom time immemorial to the 20th
century, litigation was about settling a dispute between two parties.
A sued B to make him pay for damage, to
perform a contract, or to stop B from
doing something harmful to A. In the last
few decades, however, litigation has turned
into a tool of social policy, used by government agencies or private activists in an
effort to get courts to rule in some way that
doesn’t merely settle a dispute, but makes
new law. Activists love this new tool. Sometimes it’s effective when legislative bodies or
administrative agencies seem to move too
slowly. Activists need only come up with a
sufficient budget for the legal expenses
and find a friendly judge. This approach
can also be very lucrative.
The authors of Regulation by Litigation,
however, take a dim view of this new tool.
Andrew Morriss, Bruce Yandle, and
Andrew Dorchak (who are, respectively at
the University of Illinois, Clemson, and
George Leef is director of research for the John W.
Pope Center for Higher Education Policy.
What is the public cost-benefit
balance for regulation-by-litigation? From the public’s perspective, there are no benefits to regulation-by-litigation compared
with regulation-by-rulemaking or
regulation-by-negotiation, and
there are substantial costs.
The book defends that claim, built around
three case analyses.
Before launching into the analyses, the
authors provide the reader with a useful
overview of our regulatory processes, and
they present five theories about regulation. This is crucial information for understanding the book’s arguments. Congress
and state legislatures have chosen to delegate most regulatory power
to administrative agencies.
The agencies can engage in
rulemaking, which is characterized by notice to the public of the agency’s intent to
take action on some issue,
followed by a period for public comment on the proposed rule, a requirement
that the agency respond to
at least some of the com-
ments, and possible judicial review after
the agency has promulgated its rule.
A second kind of rulemaking is
through negotiation. The agency proposes a new rule and notifies all affected parties about it, followed by negotiation to
reach unanimous agreement. (The regulated parties may not like the rule, but
they often go along with it for fear that
they might get saddled with something
worse.) This approach also requires public
notice and opportunity for comment.
That brings us to regulation by litigation, which makes no effort at rulemaking. Instead, either an agency or private
actor files suit against one or more regulated firms to compel behavioral change,
extract money, or both. This is markedly
different from either form of rulemaking because there is no public participation. This action does away with the element of political compromise and
oversight, and it leads to piecemeal regulation because the outcome only binds the
defendants in the case.
WHY REGULATE? All right, but what
drives agencies and private parties to regulate? How does it really work? The
authors realize that they need to answer
those questions, and they devote quite a
few pages to that end.
First, there is the “public interest” theory, which holds (rather naively) that regulation is undertaken because politicians
and their appointees desire to serve the
broad public interest. On this theory,
regulators act to reduce pollution,
improve industrial safety, or control the
use of pharmaceuticals out of their devotion to the public interest. This “civics
book” notion has been widely criticized,
however, since it is difficult to square
with the facts.
One of those facts is that regulatory
actions often benefit the regulated interests at the expense
of the public. To explain that,
economists have developed
the “capture theory” of regulation, namely that regulation
is often best understood as
the result of a regulatory
agency having been captured
by the very interests it is supposed to control. While the
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ulated the airlines, for example, the airlines
had a powerful motive to influence politicians to appoint people to the board who
were sympathetic to them. The board was
notorious for suppressing competition to
keep airline profits high.
Another theory of regulation is George
Stigler’s special-interest theory, which
holds that regulation is often best understood as a bidding contest in which the
outcome depends on which party has the
most to gain or lose in the struggle.
A fourth theory is that regulation is
frequently done (or threatened) as a way
of extracting wealth from an industry.
Politicians can propose onerous regulation for some industry, but
then withdraw their support
for it if political contributions
are forthcoming. Fred McChesney, the scholar most associated with this theory, calls
it “money for nothing” —
politicians get money in return
for not doing anything damaging to an
industry. (It might less charitably be called
legal extortion.)
Finally, there is co-author Yandle’s
“bootleggers and Baptists” theory, which
explains how two groups can act to bring
about a regulatory outcome they desire for
entirely different reasons. In the classic
example, the Baptists work for Sundayclosing laws because they’re morally
opposed to alcohol consumption on the
Sabbath. In that objective, they are quietly supported by alcohol bootleggers who
know that if legal liquor sales are outlawed one day per week, they will be able to
make high profits by illegally selling to
those who want a drink on Sunday. We get
“bootleggers and Baptists” regulation
when one powerful group favors regulation for moral reasons and another favors
regulation for more sinister — often financial — reasons.
Bear in mind that the
authors aren’t arguing that there are never
any positive results from regulation, but
only that people should not look at regulation through rose-colored lenses, expecting it to deliver beneficial results every
time. Frequently, it does the opposite —
especially regulation by litigation. That
brings us to their three case studies.
The first is the Environmental Pro-
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tection Agency’s litigation against the
makers of heavy-duty diesel engines in
1998. Diesel engines had been subject to
federal regulation since the 1970s, and by
1998 the stereotype of diesels as producers of vast clouds of black exhaust had
been rendered mostly obsolete by a combination of administrative rulemaking
and market pressures for greater fuel efficiency. Although the progress against
diesel pollution had been great, epa officials decided in 1998 to sue the big manufacturers of diesel engines. The ostensible reason for the suit was the allegation
that the companies had violated existing regulations because their electronic
Regulation by litigation does
away with the element of political
compromise and oversight.
engine controllers led to excessive emissions under some driving conditions. (In
reality, the authors maintain, the epa’s
motives were mainly rooted in political
considerations, especially Al Gore’s anticipated campaign for the presidency in
2000.) The engine manufacturers denied
that their controllers were illegal “defeat
devices” and said that the epa had known
about and tacitly approved the control
technology under negotiated rulemaking in 1995.
Rather than fight the epa, however,
the manufacturers settled five months
after the suit was filed. The settlement’s
key feature was the manufacturers’ agreement to comply, by 2002, with new air
standards that were to take effect in 2004.
The epa thus got to claim a victory, but
there were unintended consequences.
According to the authors, “The October
2002–compliant engines were unpopular
with engine buyers because they involved
new technology and new designs, were
more expensive, and were relatively
untested.” The epa could force the manufacturers to rush to market new, marginally improved engines, but it couldn’t
make truck buyers want them. As a result,
buyers increased orders for the older
engines (a “prebuy”) and purchased more
used trucks. The litigation led to a bulge
of dirtier trucks remaining on the road,
a hidden cost that weighs against the
epa’s apparent litigation victory.
The second case study is that of dust litigation. Dust was first understood to be a
hazard for workers in the early 1900s, especially for workers exposed to silica dust.
Litigation was threatened for the harms to
exposed workers, but was averted by what
the authors regard as a sensible legislative/regulatory approach — bringing dust
injuries under workers’ compensation.
The injured would receive almost automatic benefits through the well-established comp system, and insurers had a
strong incentive to help the firms they
insured to minimize the dust problem.
Most importantly, lawyers looking to make a killing were kept
at bay. However, things would
soon change.
After a few breakthrough
cases where the plaintiffs’ bar
figured out how to win
asbestos cases (and pocket
huge fees), there was an avalanche of
asbestos cases filed in the 1970s, ’80s, and
’90s. Many companies were driven into
bankruptcy, as courts relaxed evidentiary
standards to virtually ensure that plaintiffs would always win. Some workers
received huge damage awards even
though they suffered questionable injury;
others who clearly were injured (mostly
later claimants) got far less. The lawyers
scooped up enormous fees. Evaluating
the regulatory effect of the f lood of
asbestos litigation, the authors find that
it accomplished nothing desirable from
society’s point of view. The asbestos industry was killed and there was a great deal of
collateral damage without the least consideration of costs and benefits.
The trial bar had hoped to repeat its
asbestos litigation jackpot with a new
round of silica dust cases, but that now
seems unlikely. Presented with mass litigation over claims of silica injury in 2005,
federal judge Janis Jack, a former nurse,
looked carefully at the evidence and
detected skullduggery. She found that
the plaintiffs’ lawyers had been paying
compliant doctors to produce favorable
diagnoses on a gigantic scale. Caught redhanded, the lawyers beat a hasty retreat.
Silica dust probably won’t be the next
asbestos because mass screening techniques are apt to be subjected to far more
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scrutiny than in the past, thanks to Judge
Jack’s revelations.
Observing the effects of asbestos litigation, the authors conclude:
(W)hen private interests do
acquire quasi-regulatory power
through litigation, it can be much
more damaging than when public
regulators do. The interests of the
asbestos plaintiffs’ bar have
almost no connection with the
public interest at large…. By forcing companies into bankruptcy,
the asbestos suits have reduced
investment in productive activity
and employment. By stretching
causation well beyond its normal
bounds, asbestos litigation has
significantly reduced the deterrence that tort awards are intended to provide.
Finally, the authors turn to the tobacco
litigation that led to the 1998 Master Settlement Agreement, resulting in the
cartelization of the American cigarette
industry, huge payouts to state govern-
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ments, and much higher prices for smokers. This episode is a good illustration of
bootleggers and Baptists theory, with supposed health concerns providing the moral
high ground while the bootleggers made
off with great amounts of money.
Readers get an excellent short history of
the tobacco war going back to the 1950s,
a war the industry had been winning until
the early 1990s when an alliance of private
lawyers and state attorneys general overwhelmed its defenses. (See “Bootleggers,
Baptists, and Televangelists,” Summer
2008.) At that point, the fervent “Baptists” (anti-tobacco crusaders who wanted
a ban on cigarettes) were thrown overboard by the bootlegging attorneys general
who engineered the settlement and who
were more interested in tapping into a
huge stream of tobacco revenues. Naturally, the tobacco companies preferred
sharing their profits with politicians to a
death sentence, and thus the settlement
came about. The authors sum it up this
way: “(T)he attorneys general effectively
imposed a hidden excise tax on a consumer product and a set of regulations on
an industry without first having an open
legislative debate or a vote of the state legislatures.” It was a bad process leading to
a bad outcome. What it boils down to is
that a generally lower-income group —
cigarette smokers — is forced to pay for
extravagant state spending, little of which
particularly benefits them.
Again, the authors aren’t arguing that
traditional forms of regulation are necessarily good, but that those forms are far
preferable to regulation by litigation.
Unfortunately, they see no solution to the
rising tide of this sort of regulation, since
powerful people will litigate when they
want to. Instead, the authors suggest some
marginal improvements, such as requiring
that proposed settlements be publicized
just as proposed rules must be, and that
interested parties be allowed to participate in settlement proceedings.
The great benefit of this book is that it
exposes the way regulation really works,
especially regulation by litigation. Lenses
coated with rose-colored film are cleaned
so that those who want to see regulation
clearly can do so. Regulation by Litigation
would be a good supplementary text for
R
advanced courses in public policy.
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